RESOLVE Traders had hoped that the second half of 2019 would herald the start of a rise in sugar prices. It has not been a particularly auspicious start with prices dropping to near eight month lows in July. However, while no one expects prices to soar just yet there is growing consensus that the lows might, at last, be in place for the foreseeable future.

It could be said that volatility is the fuel of futures markets. Without it the market becomes lethargic and range bound. Sadly, this has been the case with sugar over the past nine months. In that time the entire price range has been just 218 points. To put this in some perspective, back in 2010 when prices were double what they are today the market could see daily moves of 150-200 points. Of course, back then the market was particularly bullish with large deficits in production for a couple of consecutive seasons. Fast forward nine years and the market is caught in the old bearish conundrum; too low to fall but no reason to rally. This is a result of global production surpluses for seven of the past ten seasons. The 2017/18 season saw over-production of over 15 million tonnes which saw prices dive to their lowest level in ten years last September. Apart from a 440 point rally back in October last year, on the back of aggressive fund short covering and the belief that Indian production would drop, prices have remained moribund. Once the funds had covered and any decline in Indian production was proved to be greatly exaggerated, prices tumbled and have remained flat-lining ever since.

As mentioned back in January, the 2019/20 season is likely to see a production deficit, the magnitude of which has yet to be determined.. So why are prices not pushing higher? The simple answer is stocks. The surpluses of the past two seasons have resulted in massive sugar stocks building in India and Thailand. To continue with the weather analogy used back in January, these stocks hang above the market like a dark thunder cloud stopping the sunshine of an impending deficit from shining through.

India continues to attract the wrath of other producers especially the likes of Brazil and Australia as they gear up to export up to a possible eight million tonnes next season. This follows their missed target of 5 million tonnes for the current season. Not only are other producers irked by the huge expansion in India’s sugar production over the past years (total production has doubled in past 10 years) they are even more annoyed by the ‘incentives’ given to their mills and shippers by the government to make it economically viable to export. This contravenes World Trade Organisation rules. Currently Brazil is pushing for a WTO panel to be established to rule on what they see as illegal payments. The dispute is likely to rumble on for months. In the meantime India is likely to continue to ‘help’ their shippers and, in the short term, their exports will help plug any drop in production from elsewhere. The situation in Thailand is similar with record breaking sugar production for the past two seasons.

On the other side of the coin global demand is stagnant at best. Consumption continues to remain static in Europe and US on health concerns and the imposition of sugar taxes, while in Asia where the premise that demand will remain buoyant has been questioned recently. The recent huge white sugar delivery against the August expiry is seen by traders as evidence of slack demand in the region as only Thai sugar was delivered. This was after the July expiry in raw sugar with an enormous delivery of mainly Brazilian and Thai sugar. Generally, when the tape is the best buyer, it often suggests limited demand elsewhere.

The funds certainly took the view that the large deliveries were bearish. They increased their net short position by over 78k lots after the August white sugar delivery was announced. They have remained short since last October when they momentarily flirted with building a long position but soon abandoned the idea when Indian production estimates started to increase substantially.

10 | ADMISI - The Ghost In The Machine | July/August 2019

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